Health insurance as assurance: The importance of keeping the ACA’s limits on enrollee health costs

This analysis is part of The Leonard D. Schaeffer Initiative for Innovation in Health Policy, which is a partnership between the Center for Health Policy at Brookings and the USC Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.

Protecting patients against catastrophic health expenses and medical bill-induced bankruptcy is often cited as the core purpose of health insurance. Yet lifetime limits on coverage and the lack of annual out-of-pocket (OOP) limits, which were commonplace in private insurance before the Affordable Care Act (ACA) banned the practices, negate this central function of insurance (traditional Medicare also lacks an annual out-of-pocket limit).

In the ACA replacement debate, much has been made of the need to maintain protections for people with pre-existing conditions and continuing some form of the ACA’s requirements that insurers offer coverage to all applicants without charging sicker people more (known as guaranteed issue and community rating). Indeed, the major Republican replacement proposals or outlines (including Chairman Paul Ryan’s A Better Way, Budget Committee Chairman Tom Price’s Empowering Patients First Act, and the Patient Choice, Affordability, Responsibility, and Empowerment Act (P-CARE) led by Senate Finance Committee Chairman Orrin Hatch, recent House Energy and Commerce Chairman Fred Upton, and Senator Richard Burr) include these protections for those who maintain continuous coverage, and provide a scaled-down version of these protections to everyone else through high-risk pool funding.

However, the GOP replacement plans are split over or unclear about whether to keep the ACA’s requirement that plans include an annual out-of-pocket expense limit and no lifetime limit on how much health coverage the plan will cover. They shouldn’t be.

These provisions are not without a tradeoff, either in the form of higher cost-sharing requirements before the OOP cap or increased premiums, but that is not an unreasonable cost for beneficiaries to pay for the protection against catastrophic costs. Replacement or reform of the Affordable Care Act should maintain the law’s out-of-pocket and lifetime limit protections.

Out-of-pocket limits

An annual out-of-pocket limit protects health insurance enrollees from paying more than a set amount in a year for in-network covered services. Without such a protection, the sickest patients could end up responsible for extremely high health costs, often beyond their ability to pay, which was leading to bankruptcy for a growing number of Americans.

The Affordable Care Act requires that all health insurance plans (other than a declining number of grandfathered plans) include a cap on an enrollee’s out-of-pocket expenses, which can be no higher than $7,150 for an individual or $14,300 for a family plan for 2017.

Given that the ACA sets fixed actuarial value (the percentage of covered health costs that the plan pays for the average beneficiary) tiers for marketplace health plans (Bronze, Silver, Gold, Platinum), including an OOP cost limit means that enrollees in a given tier will be responsible for a higher percentage of their health costs before the OOP limit is reached. For example, using the Centers for Medicare and Medicaid Studies (CMS) Actuarial Value Calculator, eliminating a $7,000 OOP cap from a Silver plan altogether would allow that plan to require only roughly 10 percent instead of 20 percent coinsurance on health care claims above a $2,500 deductible. While this would help people with above $2,500 but below $47,500 in total annual health costs, not having an OOP cap would significantly harm the sickest and highest-cost individuals who need the benefits of insurance the most – they would still continue to pay 10 percent of their health claims incurred with no limit.

Another way to highlight the tradeoff is that the OOP cap, for an individual, makes up nearly 10 percentage points of actuarial value for a Silver level plan (that in total, has a 70 percent actuarial value).

Before the ACA, out-of-pocket caps were already pervasive in the individual market – 96 percent of those who purchased comprehensive health insurance had an OOP cap – and relatively common in the employer health insurance market.

However, at least 17 percent of people with employer-provided health insurance lacked an annual out-of-pocket cap on their plan in 2010, which is only marginally lower than in 2004 when 20 percent lacked an OOP cap. Since the law’s enactment, that percentage has declined to the point where only 2 percent of workers covered by employer health plans still lack an out-of-pocket cap as of 2016. As the Council of Economic Advisers notes, that percentage declined modestly in the years immediately following passage of the ACA likely as a result of firms making changes in anticipation of the requirement, and then precipitously in 2014 when the requirement took effect.

Source: Council of Economic Advisers

If the shares of privately-insured Americans with individual market and employer coverage lacking an out-of-pocket cap still remained at 2010 levels, approximately 24 million fewer people would have this important protection today.[1]

Lifetime limits

The Affordable Care Act prohibits health plans (including grandfathered ones) from placing a lifetime dollar limit on the amount of covered health expenses they will pay for, which was a common practice before the law’s enactment. Health plans with a lifetime limit would stop paying for an enrollee’s health care expenses after they reached a certain amount over the entire life of the policy, potentially leaving the sickest patients responsible for extremely high costs thereafter. This prohibition is one of the key ways in which the ACA benefits people with employer-provided health insurance, and it represents a valuable gain for many with chronic and catastrophic conditions.

Moreover, a study from PriceWaterhouseCoopers (PWC) found the cost of eliminating lifetime limits to be minimal because only a small number of people exceeded them. Specifically, the study found that increasing lifetime limits from $1 million to $10 million would increase premiums, on average, by roughly 1 percent.

Leonard D. Schaeffer Chair in Health Policy Studies

However, lifetime limits were still very common in both the individual and employer health insurance markets before the ACA. In 2009, before the ACA, 59 percent of workers with employer-provided health insurance were in a plan with a lifetime limit on how much it would cover, according to the Kaiser Family Foundation / Health Research & Educational Trust Employer Health Benefits Survey. 27 percent of those had a lifetime limit between $1 million and $2 million, while the other 73 percent had a lifetime limit greater than $2 million.

At the same time, 89 percent of health plans in the individual market included a lifetime limit, averaging roughly $5 million, per a 2009 survey conducted by America’s Health Insurance Plans (AHIP).

Neither level of prevalence had changed much since 2007, when 55 percent of workers in employer-provided plans and 90 percent of individual market enrollees had lifetime limits.

If these shares of privately-insured Americans with a lifetime maximum benefit had remained at 2009 levels, 109 million more people would still have a lifetime limit on their health insurance today (92 million with employer coverage and 17 million with individual market coverage).[2] All of these people would still be exposed to the risk, albeit small, of ruinous health care expenses.

Conclusion

In crafting a replacement or reforms to the Affordable Care Act, lawmakers should maintain the law’s requirements that plans include an annual out-of-pocket limit and no lifetime limit on benefits in order to provide protection against catastrophic health costs. Otherwise, many with employer-provided or individual market health insurance could see these important safeguards disappear.

[1] Combining the most recent Current Population Survey estimates of employer-based health insurance (156 million), marketplace enrollment from CMS, ASPE estimates of off-exchange nongroup enrollment, and state estimates of Basic Health Plan enrollment in NY and MN, this calculation represents the difference between the number of people who would have had an out-of-pocket cap if the shares of people with out-of-pocket caps in the employer and individual markets remained at pre-ACA levels versus today.

Combining the most recent Current Population Survey estimates of employer-based health insurance (156 million), marketplace enrollment from CMS, ASPE estimates of off-exchange nongroup enrollment, and state estimates of Basic Health Plan enrollment in NY and MN, this calculation represents the number of people would have still had lifetime limits on their policies if their prevalence was still at 2009 levels (rather than 0 today).